Earnings Call Transcript - CMT Q3 2025

Operator, Operator

Good morning, everyone. Welcome to the Core Molding Technologies Third Quarter 2025 Financial Results Conference Call. This conference call is being recorded. I will turn the call over to Sandy Martin from Three Part Advisors. Please go ahead.

Sandra Martin, Three Part Advisors

Thank you, and good morning, everyone. We appreciate you joining us for the Core Molding Technologies' conference call to review our third quarter 2025 results. Joining me on the call today are the company's President and CEO, Dave Duvall; as well as COO, Eric Palomaki; and CFO, Alex Panda. This call is being webcast and can be accessed through coremt.com via an audio link on the Investor Relations Events and Presentations page. Today's conference call, including the Q&A session will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements or expectations or future events or future financial performance are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are uncertain and outside the company's control. Actual results may differ materially from those expressed or implied. Please refer to today's earnings release for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Core Molding Technologies assumes no obligation to update or revise any forward-looking statements publicly. Management will refer to non-GAAP measures, including adjusted EPS, adjusted EBITDA, the debt to trailing 12 months EBITDA ratio, free cash flow and return on capital employed. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. Our earnings release has been submitted to the SEC on Form 8-K. And now I would like to turn the call over to the company's President and CEO, Dave Duvall.

David Duvall, CEO

Thank you, Sandy, and thank you all for joining us today. The positive momentum we've highlighted last quarter has continued to build and remains firmly in place. The only change from our Q2 update relates to the timing of our tooling revenue, which has shifted into the fourth quarter. As a reminder, tooling is an iterative process involving fabrication, testing and ultimately, customer final sign-off, making it inherently challenging to predict the exact timing of revenue recognition. Within the trucking industry, several projects remain on hold, pending greater clarity around the administration's policy direction. That said, we have continued to make significant progress this year and this quarter, across our next largest verticals. During the third quarter, sales in our power sports, building products, and industrial and utilities markets grew year-over-year, reflecting the continued traction of our investor growth initiatives and the gradual improvement in market conditions. Power sports, a major sales category for Core achieved its first year-over-year growth in 8 quarters, marking a return to growth after two full years of declines. We believe this momentum is being fueled by a combination of new product introductions and our continual wallet share growth. As an example, we are now in full production for the UTV skid plates. In the third quarter, we successfully launched the UTV skid plate program we've discussed on prior calls. We're seeing signs of recovery in demand for power sports helped by expectations for continued lower interest rates and new launches. That combination is creating a more active demand environment across both water and land power sports as we head into 2026. Regarding the skid plate program specifically, we expect it to generate approximately $8 million in annual run rate revenue once fully ramped. While this category remains somewhat seasonal, we believe power sports is positioned for a stronger rebound in 2026, particularly in a more favorable interest rate environment following recent cuts and new program launches. Last quarter, we highlighted $46.7 million in new business wins this year, 99% of which is incremental. This builds on the $45 million in wins from last year. We are pleased with the momentum and excited about our known future growth and continue to see additional opportunities and a robust sales pipeline of over $250 million. But we know we still have many opportunities to leverage the execution improvements we have made. And therefore, we are continuing to invest and aggressively refine our sales systems. This has always been the last phase of the Core Molding transformation, and it is our current must-win battle, as we drive to leverage all the business execution improvements and unlock the earnings potential of our improved capabilities. To accelerate growth further, we have implemented a value selling program, and we're adding three new business development roles that are focused on and incentivized to expand wallet-share with key partners and drive lead development for our new sheet molding compound opportunities. On last quarter's call, we discussed the completion of a market analysis to determine the total addressable market for SMC in North America. During the third quarter, we partnered with four potential customers who completed molding trials of our material and provided positive feedback. Based on the successful product trials with the initial customers, we are optimistic about our current market potential, as we've stated. Earlier, we see the quote-to-cash cycle for this product in the 6-month range versus our fully designed product being in the 12- to 18-month range. We're pleased with the level of end market diversification represented in these trials, which includes electrical boxes, multifamily commercial doors, buses and roofs and hoods for truck customers. We remain focused on broadening our sales and marketing work to promote Core's proprietary SMC product as raw material for key customers. We estimate the total addressable market for this product exceeds about $200 million. Our focus on operational improvements and key investments in our SMC operations has significantly improved our capacity, consistency and performance, which we are seeing as key value propositions as we engage with customers in this market. We have always viewed our advanced formulations as a deep competitive differentiator for Core and now working directly with SMC customers, we clearly see our product and service advantages versus their current suppliers. Specifically, Core has more consistent material, expertise in modifying SMC formulations to meet specific molded part requirements and Core has significantly shorter lead times. All of these factors create significant value for our customers, particularly for customers whose end products are built around Core's sheet molding compound as is always the case with SMC. Work continues on our strategic $25 million investment and layouts are complete for the Matamoros expansion and the new greenfield build in Monterrey, Mexico. Monterrey has been designed to provide additional capacity for future growth in low pressure injection molding and DCPD processes. Additionally, we are adding topcoat paint capabilities to this facility as customers have specifically asked for this capability, especially in the construction and agricultural machine market. We believe the Monterrey region will continue to grow and has significant long-term potential for us. We have also ordered two new state-of-the-art 4,500-ton compression molding presses, and we have completed the automation design and plant layout for a sleeper roof program in our Matamoros facility. The tooling revenue from these programs is anticipated to be approximately $35 million and is expected to be recognized in 2027. Organic growth remains our top priority in our capital allocation strategy, and this investment not only supports the launch of a major truck program, but also adds DCPD molding and topcoat paint capabilities to our Monterrey business, serving growing industries, including the construction agriculture market. The addition of DCPD molding positions us closer to key customers that highly value this process. Additionally, our new topcoat paint capabilities enable us to deliver final topcoat paint products that are ready to install by our customers. This is a significant value add for our customers, which reduces overall cost and makes the process from order to finish product more efficient. Together, these investments expand our technical capabilities and create new durable revenue streams. We have good visibility into the truck and power sports industry recovery, which gives us confidence in the potential for over $300 million in total revenue in 2027. These long-term programs are expected to generate approximately $150 million in revenue over the next 7 to 10 years. Based on our current projections across truck power sports and other growing end markets, we expect annual product revenue to exceed $325 million within the next 2 years. Turning to our Q3 financial results. Revenue was $58.4 million, which is down 19.9% from the prior year, with over half of the sales decline coming from the known Volvo transition and the remaining due to declines in other truck demand. Gross margin was 17.4%, which is within our targeted range of 17% to 19%. Adjusted EBITDA margin of 11%, that's up 70 basis points from a year ago. Cash flow from operations for the first 9 months of the year of over $14 million, which continues to exceed our year-to-date net earnings. We again delivered stable gross margins this quarter within our projected range and positive year-to-date free cash flow. Sales declines in the third quarter were more than we expected, but the new business wins are there. And we continue to ramp up our investor growth efforts. We expect fourth quarter sales to be up year-over-year primarily due to significant increases in tooling sales. Regarding the ongoing succession plan execution, Eric and I are working closely in all facets of the role as we continue to progress towards the CEO succession plan for May of 2026. As I've discussed in the past, we have robust systems for organizational development and succession planning throughout all levels of our organization. In conjunction with our succession plan for Eric, we have developed a strong bench under Eric, including an Executive President of Mexico Operations, Arnold Alanis, who has worked for Core for over 13 years, and our Executive Vice President of U.S. and Canada Operations, Mike Gayford. Arnold and Mike have been a part of the entire leadership transition over the last year, and I appreciate their increased engagement in our business allowing Eric time to focus on transitioning to CEO. I believe that our culture is a competitive advantage and a key benefit of that strategy is our ability to develop and grow leaders from within Core Molding as demonstrated by our ability to promote new executive leaders from within the organization. I think it's a testament to the effectiveness of our organizational development and succession process. Now, I'll hand the call over to Eric to share comments on our new production and operational efficiency efforts.

Eric Palomaki, COO

Thank you, Dave, and good morning. One of our newest program opportunities is a large Canadian rail infrastructure project. The cable railway containment trough system replaces concrete systems and its installations were labor-intensive, slow and costly. Under the traditional installation process, crews excavate a shallow trench and use a crane to lift and position each concrete section. The benefits of our proprietary polymer and composite troughing are that they are lightweight, non-conductive, easier to install and made from recycled materials, reducing both installation labor and lifetime maintenance costs. I'd also like to share an update on the footprint optimization initiative launched at the end of the second quarter, which we expect to be completed by year-end. As part of our ongoing focus on product-level profitability, the current softness in truck demand created an opportunity to consolidate our RTM or Resin Transfer Molding process by purposefully relocating select programs to another one of our facilities. This strategic move will streamline operations at the originating site and is expected to deliver further margin improvement. Lastly, I wanted to call out our operational teams for their 99% on-time deliveries and excellent 62 PPM performance. PPM, which measures the number of defective parts per million produced, is used by our customers to measure quality performance. The rate below 0.01% indicates a high level of quality and demonstrates the precision of our quality processes. We have also maintained industry-low safety incident rates and employee turnover rates, which we take pride in. These favorably trending metrics reflect well on our culture and commitment to excellence across all our people and our plants. With that, I would like to turn the call over to Alex to run through the financials.

Alex Panda, CFO

Thank you, Eric, and good morning, everyone. For the third quarter, net sales totaled $58.4 million. As Dave stated, product sales were primarily down due to the known Volvo transition. Excluding the Volvo transition, sales were down 8.7% from prior year due to lower demand primarily in the medium and heavy-duty truck verticals. This was partially offset by new product sales to customers in power sports, building products, and industrial and utilities markets. Despite the operating deleverage experienced in the third quarter, we maintained a gross margin of $10.1 million or 17.4% of sales. Over the past 12 months, we have executed a series of initiatives focused on improving operational efficiency, optimizing raw material costs, and enhancing overall margin performance. These efforts have helped offset the fixed-cost deleveraging associated with the planned Volvo transition. We continue to expect our gross margin to remain within our targeted range of 17% to 19% for the year. SG&A expenses for the third quarter were $7.6 million or 13% of sales compared to 12% in our prior year period. Excluding the $220,000 in footprint optimization costs, our SG&A rate would have been 12.6% for the quarter. As Eric discussed, our footprint optimization project is underway. We have invested $500,000 so far and plan to invest $1.5 million by the end of 2025. Again, this project involves relocating production to a different plant to generate cost savings of over $1 million each year, beginning in January of 2026. Operating income for the quarter was $2.6 million or 4.4% of sales, down from $3.6 million or 4.9% of sales in the same period in the prior year. The third quarter's interim effective tax rate was 29.3% compared to 18.7% in the prior year quarter. The increase was due to taxable income being generated in higher tax rate jurisdictions this quarter. Net income for the third quarter was $1.9 million or diluted income per share of $0.22 compared to net income of $3.2 million or diluted EPS of $0.36 in the comparable year period. Excluding the impact of footprint optimization costs, our third quarter diluted EPS would have been $0.24. Third quarter adjusted EBITDA was $6.4 million or 11% of sales. We generated $14.2 million in GAAP cash from operations. And after capital expenditures of $9.3 million, our free cash flow was $4.9 million for the first 9 months of 2025. We continue to expect the 2025 capital expenditures to be approximately $18 million to $22 million, including investments for the Mexico expansion. As we previously announced with the award of the Volvo Mexico business, the company will invest approximately $25 million over the next 18 months. As of September 30, our balance sheet was strong with a total liquidity position of $92.4 million, comprising of $42.4 million in cash plus $50 million available under the revolver and capital credit lines. The company's term debt was $20.3 million at the end of the quarter, and our debt-to-EBITDA ratio for the trailing 12 months remains less than 1x. Our return on capital employed was 6.5%. And excluding cash, the rate was 8.7%. As we continue to launch new business, we expect this metric to improve by better leveraging top-line performance and driving better asset utilization. Both ROCE metrics are computed using the trailing 12 months of operating income and total capital employed, a pre-tax metric. Please see our earnings release for the GAAP to non-GAAP reconciliation tables. Our capital allocation strategy remains flexible with a significant focus on organic growth as well as disciplined management of debt, working capital, and share repurchases. Year-to-date, we have spent $2.5 million on Mexico expansion projects and expect to spend a total of $7.5 million by the end of 2025 and $17.5 million in 2026. For the 3 months ended September 30, no shares were repurchased. And to date this year, we have repurchased 151,584 shares at an average price of $14.80. Our full-year sales expectations are down 10% to 12%. However, we have forecasted fourth quarter sales to increase driven by new program launches and significantly higher tooling sales. As a reminder, regarding tariffs, our products in both Canada and Mexico are USMCA compliant and are currently exempt from tariffs. We will continue to closely monitor how changes in trade policies affect our customers and their end markets. And with that, I would like to turn it back to Dave.

David Duvall, CEO

Thank you, Alex. We are excited about new and existing customers and end markets. As Eric mentioned, we are finalizing negotiations on a large Canadian project for the rail data line transmission troughs, called Trotrof, which is worth about $15 million in annual revenue starting in the second half of 2026. We continue to see a strong pipeline of opportunities with over $250 million in business development potential in our pipeline. We believe we can add over $40 million in new wins that would be awarded in the next 3 to 6 months. We're also excited about this year's wins, because they are in new and emerging markets for Core. These new markets, which we strategically targeted, include new pickup box panels for small EV trucks, satellite tracking systems, and truck applications. We plan to expand our DCPD molding process for large OEMs in the areas we already serve and have added topcoat paint to our full-service partner model. We continue to invest in our sales organization, and we're driving hard to develop new customers who trust us with their long-term business. Eric and I are highly focused on further scaling operations leveraging our fixed cost base and optimizing our portfolio footprint. Our commitment to continuous performance improvement, especially with the lower current demand, positions us to translate top-line growth into bottom-line results. We are excited about the future and look forward to leveraging all the improvements with the addition of the $65 million in incremental wins we have achieved in the last 20 months. We will continue to strengthen our operations and take the necessary actions to drive long-term business capability and profitability. We are pursuing the most promising opportunities in new markets and growing wallet-share with our current long-term customers. We are confident this is only the beginning. New areas are emerging, and we will continue to evolve in the construction sector, such as the commercial windows and doors market. We focus on large, diverse sectors such as construction, energy, industrial, aerospace, and medical markets, and we have proven we will win. We are driving to engage our sales and technical teams earlier in the design cycle to expand wallet-share and educate customers of our full range of value-added capabilities, including SMC formulation, large part molding, and topcoat painting. Customers desire a strategic partner like Core Molding to handle design, fabrication, and completion with the topcoat paint. Our teams are committed to maintaining our must-win battle excellence by: one, driving incremental sales growth into new markets; two, improving our margin profile through operational excellence and our innovation pipeline; and three, continually investing in a growing business that has proven it can execute well. Although the truck industry forecasts continue to look soft for Q4, ACT and customer forecasts indicate a truck build increase in the second half of 2026. As we discussed last quarter, the great pause, as one customer put it, continues with delayed decisions in major markets still serving in a lower-than-expected demand environment. Tariff concerns have caused companies to pause, and we've seen delays in demand and even more so in the decisions of launching new programs. However, recently, we have seen signs of stabilization and rebounding demand in several of our key end markets. We are finding ways to attract new customers and increase wallet-share with current customers. Our must-win battle of invest for growth continues, which is reflected in our confidence to make significant investments in future growth. Developing a world-class engineering and manufacturing solutions partner for large and ultra-large molded solutions is our goal. Again, I want to thank our team for their hard work and dedication to excellence which has enabled us to achieve successes throughout our transformation journey. I also want to thank our customers, investors, and Board for their belief in what we do every day at Core Molding. Finally, we will present our investment story and host one-to-one meetings at the Southwest IDEAS Conference in Dallas on Wednesday, November 19. Please reach out if you would like to see us there in person or set up an investor call soon. With that, let's open up the line for questions.

Operator, Operator

Your first question for today is from Chip Moore with ROTH.

Alfred Moore, Analyst

I wanted to address the recent discussions regarding tariffs specifically related to trucking. It seems that some actions have been delayed from October to November. Can you share your updated views on these tariffs, any potential impacts, or what you're hearing from customers about them?

Alex Panda, CFO

Yes. All of our products comply with USMCA regulations. At this point, we believe we are exempt. Our main concern is the potential impact on customer demand in the future. However, we are not currently observing any effects from tariffs.

Alfred Moore, Analyst

Got it. Okay. No, that's helpful. And I guess...

David Duvall, CEO

I believe that, in general, from an operational perspective, we manage operations in both the U.S. and Canada. If necessary, while it may not be a quick transition, it is certainly feasible to relocate.

Alex Panda, CFO

Yes. And then, the only other thing I would add is we have RMA raw material adjusters in all of our contracts. And so, if we do get hit with the tariff and increased costs, we can pass that through to customers.

Alfred Moore, Analyst

Got it. That's helpful. As you look ahead, it seems like your outlook for achieving over $300 million is quite strong. Considering 2027, what do you see as the biggest risks or potential upsides? Additionally, what plans do you have related to trucking as we approach 2027?

David Duvall, CEO

That's a great question. From a high level, our quote-to-cash cycle time is 12 to 18 months. The Volvo program is set to launch in '27, and we have $45 million in wins from the previous year and an additional $47 million in incremental wins this year that will be realized over the next 18 months. As we ramp up, we expect to see initial growth for about 6 to 7 months before reaching full volume, which is when our sales will really start to materialize, and we're quite enthusiastic about that. Currently, when we engage with truck customers, we're observing that the truck market is anticipated to rebound in the second half of next year. One customer we spoke with recently mentioned a significant increase expected during that period. Thus, our primary concern is the speed of the truck market's recovery since it can rise rapidly, and we need to ensure we can hire and meet demands during this upswing. The market tends to rise as swiftly as it falls, and the deeper the decline, the greater the likelihood of a strong rebound.

Alfred Moore, Analyst

Perfect. If I could ask another one. Just around, sort of, more near term, the tooling revenues getting bumped to Q4. Any sense of how to think about tooling revenues maybe for Q4 and even over the next couple of quarters just with all the new programs you've got on the horizon?

Alex Panda, CFO

Yes. So, for the full year of 2025, we anticipate tooling sales to be roughly 15% of our total sales in 2025. And then keep in mind, Chip, those sales will be at a lower margin than our product sales. And then in the future year, '26, I mean, we're not really giving any guidance from a number perspective for '26, but the Volvo Mexico tooling job will close. It will be closed at the end of '26 maybe slips into '27, but it'd be December of '26, maybe January of '27.

Alfred Moore, Analyst

Got it. So, there's a slight negative mix impact in Q4 due to increased tooling revenues. Is there any way to address this?

Alex Panda, CFO

Yes. So, margins will take a little bit of a hit, but we still are providing guidance that we'll be within that 17% to 19% target that we've put out there each quarter and for the full year.

Alfred Moore, Analyst

Yes. That's what I was going to ask. And I was going to follow up just sort of longer term as the tooling normalizes. Is 17% to 19% still the right way to think about it? Or do you think there's upside potential at some point on higher volumes?

Alex Panda, CFO

Yes. I think when we start getting back into the $300 million, there's going to definitely be some upside. I mean, we'll start getting back some fixed leverage will reverse favorably. And so, I think that will be worth anywhere, I would say, right around 200 basis points. If you go back and look at our previous quarters and see the lost leverage each quarter. I think if we go back two years, we're losing right around 200 basis points. So you could add 200 basis points, I think, is a good way to look at it.

David Duvall, CEO

Also the part that we beat is that, on the new programs, the systems that we put in place and how we're quoting business, it's definitely incremental on the margin side.

Alfred Moore, Analyst

Excellent. Okay.

Alex Panda, CFO

I don't want to give you a number on how much yet, though.

Operator, Operator

You have a follow-up question coming from Chip.

Alfred Moore, Analyst

I just want to make sure I wasn't hogging the line. I guess, just one more for me on the new business opportunities. The Canadian rail project, that's a nice win. Is there opportunity for similar type projects and then SMC, how is the traction there? It sounds like it's going pretty well, but any more detail you can provide?

Eric Palomaki, COO

Yes, there are two parts to that, Chip. Firstly, regarding the rail Trojan troughs, we had that business in 2022 and 2023. It is typically project-based, occurring when a city or municipality undertakes a section of rail, which makes it a significant project for us over a couple of years. After a few years of no projects, we currently have one underway to build a test track for next summer, which will lead into a larger multiyear program. We are excited about this opportunity. While I can't say we've completely secured it yet, we are actively working on providing the test track and believe we are well-positioned to win the full installation. Your second question was about SMC. We mentioned some details earlier. Since last quarter, we have four specific customers that are currently trialing and actually molding parts with some of our engineering teams. We've made significant progress with four of the ten customers we targeted. We believe that in the next quarter, we will be able to announce awards or agreements with some of those customers in our next earnings report.

Alfred Moore, Analyst

Perfect. Okay. And maybe just last on the buyback. You didn't do any this quarter, but can you just remind us what your authorization is there?

Alex Panda, CFO

Yes, we have just over $2 million left in the buyback, which is still in place as of today. We do plan to utilize that as a way to use our capital.

Operator, Operator

Your next question is from Bill Dezellem with Tieton Capital.

William Dezellem, Analyst

A couple of questions. Would you please start by walking us through the tooling business that shifted to Q4 from the Q3, what the dynamics were behind that?

Alex Panda, CFO

So, regarding tooling, Dave went over this during the call. For us to recognize revenue, the customer must accept the tooling, which involves various tests such as full production runs and quality checks that adhere to different specifications. Working with customers, these tests can sometimes be delayed for various reasons, such as engineering changes initiated by the customer. In this instance, one of our larger tooling projects that we initially anticipated completing in Q3 has now been pushed to Q4. We are currently conducting those tests, and at this moment, I do not foresee any further delays for that specific job. However, this situation reflects the inherent nature of tooling; while we exert as much influence as possible and collaborate with our clients, there remains a risk of delays from one quarter to the next. Ultimately, this is not lost revenue; it's merely a timing matter.

David Duvall, CEO

Bill, the way we view it is that often, the issue isn't just on our end. The whole product level is what they're dealing with. They are trying to put everything together, and ideally, all suppliers and validation tests would work seamlessly to achieve full approval. If any part fails, the entire supply base cannot be approved. Once we receive the necessary approval, we can recognize the revenue based on a signed document. If the approval process is going to take a long time, we will certainly engage with the customer to emphasize the need for timely completion, but if it only takes weeks, it may not be worth the effort to push hard.

William Dezellem, Analyst

That's helpful. And then, you referenced the footprint optimization that you were doing and that was going to have a nice cost savings. Would you please walk us through physically what's moving from where to where and why that's taking place besides just the money aspect and maybe it's just straightforward as the cost savings.

Eric Palomaki, COO

Sure, Bill. In the past, we had a business in Batavia, Ohio, focused primarily on resin transfer molding, also known as RTM parts. We eventually closed that plant and shifted production to our facilities in Matamoros and Columbus. Now, we've decided to move the remaining operations from our Columbus facility to Matamoros. Our Matamoros facility has employees with 20 to 30 years of experience in resin transfer molding, with over 300 workers dedicated to that business unit. They possess the skills and commitment needed for this work, whereas we’ve faced challenges in Ohio with the labor-intensive nature of producing those parts, which involves significant manual effort with fiberglass. Therefore, we are consolidating operations to leverage our strengths and skills, which also brings some labor savings. Ultimately, it's about the technical expertise and the skilled workforce we have available.

William Dezellem, Analyst

That is very helpful. And the math behind this, you said was you were going to spend about $1 million on the transfer, and it will save you about $1 million a year. Did I hear that correct earlier?

Eric Palomaki, COO

It will be about a $1.5 million total investment, so cost side and then $1 million a year annual run rate ongoing. So...

Operator, Operator

We have reached the end of the question-and-answer session, and I will now turn the call over to Dave Duvall for closing remarks.

David Duvall, CEO

Thank you for your continued interest in our company. We look forward to providing an update on our progress when we report our fourth quarter results. Have a great day. Thank you.

Operator, Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.